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The Detrimental Impact of Cutting Costs at All Costs: A Case of the Goose and the Golden Eggs

A factory and all its glory is a business asset. Within a factory, you have many things at play: people, processes, technology, culture, waste, organizations and sub-organizations, hierarchy, opportunities, dreams, breakthroughs, failures, successes, entitlements, disenfranchisement, rewards, consequences – this list can go on forever. Its possible (and no doubt has happened) for a person to live a majority of their life inside the four walls of a factory. The job of a factory is to make stuff at the highest possible quality and lowest possible cost. From a purely economic viewpoint, you pump money into a factory and it pumps valuable product out. The intent is to pump out more value that you are pumping in because this is what generates wealth. This creates a dynamic where wealth can be maximized in two ways: one is to maximize the value being pumped out; the other is to minimize the money being pumped in. Let’s look at the merits of each approach separately:

Maximum Value Creation: Most manufacturing businesses are built on this principle. This is what gets sold and what customers come to know and love about the company. When you see the product on the shelf at Walmart, it says “look at all these fantastic features” and “new and improved”. Entire companies are built on the value that they bring to their customers’ lives. The factory is an asset that creates value for both the company and it’s customers. When a manufacturing company creates a valuable product, it can grow until the market becomes saturated. Up until that point, the company is presumably profitable, products are selling faster than you can make them – let the good times roll. Many people don’t realize that Lean Manufacturing was created as an approach to maximize value creation and strengthen the company’s viability. At some point, the market does become saturated and the company’s growth becomes flat – or even worse, starts trending the other way as many companies saw between 2008 and 2011. People come to miss those good ol’ times when the financial statements always had great news to share. With increasing pressures from all angles to turn those numbers from red back to black, many companies start looking at alternative ways to grow wealth.

Minimum Cost Operations: Cutting costs is another way for a company to grow wealth. A company should not carry costs that are not needed. In fact every company has an obligation to its stakeholders, especially its shareholders and customers to remove unnecessary costs from its business processes. The challenge is removing costs without compromising the value that it has brought to its customers’ lives. Cost cutting should be a careful, continuous, and deliberate process as to continue nurturing and protecting the asset that is the factory. Factories thrive on happy employees, innovation, and streamlined processes. When cost cutting impedes on any one of these critical factors, the factory as an asset becomes malnourished and productivity suffers. When the manufacturing base becomes malnourished, the company overall may soon find itself in trouble. Many companies have gone as far as divesting completely in their in-house manufacturing base and instead opted for outsourcing to China and other countries to take advantage of lower labor costs. This is done at many expenses, including destroying the innovation pipeline, losing core capabilities, shipping jobs abroad, and funneling American dollars to other countries. Unfortunately, its difficult to capture these costs in a financial statement. This approach essentially delegates the company’s most important job, to maximize value creation – in other words, compromising their core capability to create value for their customers.

Growth for a manufacturing business is achieved by maximizing the amount of value being created in its processes. As such, value creation should never be de-prioritized to cutting costs. However, every company has the obligation to continuously reduce operating costs while maximizing value. This is the true and original intent of Lean, Six Sigma, Agile Manufacturing and other continuous improvement initiatives. As the definition of value changes for customers, so should the manufacturing processes. This requires agility and continuous innovation, which every healthy factory needs. A manufacturing efficiency expert such as those at Manuficient can help you assess your manufacturing business’ value proposition and identify areas to reduce costs effectively.